Unemployment 7.8% to 22% - Is There A Better Method?

Recently I wrote "Why The Real Unemployment Rate Is 16.9%"which sparked quite a few e-mails revolving around the issue of the way the Bureau of Labor Statistics measures unemployment. In that article we discussed the differences between the U-3 and the U-6 rates and showed what unemployment would look like if you included those that had been out of work longer than 52 weeks. In reality the problem is far worse - as I stated previously: "In reality this calculation is still not accurate, and on the low side, as there is currently no clear way to measure the millions of individuals who have disappeared into the abyss of the uncounted. Many of the 88 million individuals that are currently unemployed, and not counted by the BLS, would likely be more than happy to work given the opportunity. However, in the current economic environment, those options are not widely available which is why there is very much a silent "depression" running through the underbelly of this economy. In this depression we don't see the bread lines and soup kitchens simply because they arrive electronically and in the mail."

Correction - Unemployment Is Really 22%

In 1994, under the Clinton Administration, the Bureau Of Labor Statistics (BLS) changed the methods in which it calculated the levels of unemployment in the U.S. While the changes appeared to be minor on the surface at the time - the impact today is likely far greater than originally imagined. (for more detail on the changes read here)

According to the Bureau of Labor Statistics (BLS) the U3 measure is described as “total unemployed, as a percent of the civilian labor force (official unemployment rate).” That rate, as of the most recent release is 7.8%. However, if we look at the U6 measure which includes the total unemployed (U3), plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers - the unemployment rate now jumps to 14.7%.

However, while the U-6 is a more complete picture of unemployment in the U.S. it still falls short as it does not count those that are considered to be "Not In Labor Force." These are individuals that have been unemployed for so long that they are considered to have given up looking for work. However, while in more normal economic times this may be the case, in a "balance sheet recession" economy the actual unemployment rate becomes distorted.

The chart below shows the trend of individuals that are considered "not in labor force (NILF)" both before and after the 1994 revisions by the BLS.

You can clearly see that something has gone awry between the pre- and post-1994 calculations. The reasoning by the BLS gives you the answer: "(P)rior to 1994 persons were not asked whether they had searched for work recently. If they gave one of the five 'discouraged worker' reasons for not looking for work in the past 4 weeks, they were assumed to have 'given up' the search for work, although they weren’t asked when they had last looked. As a result of the greater specificity introduced in 1994, the number of discouraged workers was cut approximately in half, from about 1.1 million in 1993 to 500,000 in 1994.”

Roughly 600,000 works were wiped off the roles of the unemployed register with a simple adjustment to the calculation method. The next chart shows you the number of individuals falling into those five "discouraged worker" categories and assuming to have "given up" looking for work. As you can see, since 2009, that number has soared which gives rise to the concern over the current method of calculation used by the BLS.

Those individuals are added back into the civilian labor force total which comprises the adjusted labor force from which the U-3 and U-6 rates are calculated from. The chart below shows the historical adjusted labor force since 1994.

From this total we can now add back in the number of workers that have been removed from the roles because they have been unemployed longer than 52-weeks. Economist John Williams has been tracking this version of unemployment for many years.

As you can see there is a large difference once adjustments are made. While the official U-3 rate of unemployment is 7.8% the less discussed alternate U-6 rate remains at 14.7%. While both of those rates have shown steady declines since the peak of last recession - the adjusted number of unemployed individuals has continued to rise and now approaches 22%.

With the Fed's zero interest rate policy hurting savers, two nasty bear markets since the turn of the century, a housing bust and financial crisis - the adjusted measure of unemployment would seem to be a more realistic rate. However, calculating these measures of unemployed individuals, based on survey samplings of a few thousand households once a month, is complicated and prone to error.

A Simpler Measure

A far simpler, and more transparent, measure of employment in the U.S. is looking at the ratio of those who normally work full-time jobs to the total population. Unlike the traditional employment metrics used by the BLS which have been adjusted to obfuscate the real employment situation - the level of full-time employment relative to the total population accounts for the movements into, and out of, the workforce. This calculation provides a better barometer of the economic health of the country.

While the initial argument is that looking at employment relative to the total population sweeps up people who are unwilling, and/or or unable to work, it also catches the millions of individuals who would work given the opportunity, the millions of retirees who are still working to make ends to meet and the underground economy that works on a cash basis. The reality is that by this measure the real employment situation is running close to its worst levels since 1968.

There is no perfect measure of unemployment. However, it is apparent that the current methods used by the BLS are not only flawed but misleading on many levels. What is obvious is that the current employment situation in the U.S. is far worse than the headline figures report as the sharp rise in the number of individuals claiming foods stamps and disability suggest.

With all of the individuals that are simply disappearing from the labor force each month due to current calculation methods - the economy may well reach full employment levels in the next few years. The problem, of course, is that the economy will still be running at sub-par growth rates due to lower rates of consumption, lower wages and record numbers of individuals on the government dole.

Lance Roberts is the General Partner and Chief Portfolio Strategist for STA Wealth Management. He is also the host of "Street Talk with Lance Roberts", Chief Editor of "The X-Factor" Investment Newsletter and the Streettalklive daily blog. Follow Lance on Facebook, Twitter and Linked-In